Posted almost 7 years ago

Invest a Solo 401k in an LLC- The Self-Directed Solo 401k LLC Process

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A self-directed solo 401k is a type of retirement plan for the self-employed that may be invested in an LLC, whether a single member or multiple member LLC. This communication covers the process of investing a solo 401k in a limited liability company (LLC) where the solo 401k is the sole/only member.

STEP 1: Convert Existing Solo 401k or Individual 401k to a Self-Directed Solo 401k or self-managed 401k

The existing solo 401k or Individual 401k will need to be converted to a self-directed solo 401k. This is specially the case for individual 401k plans held at companies such as   Oppenheimer, Sun America, Hartford, Fidelity, Schwab, E-Trade, Sharebuilder, Vanguard, VOYA, Edward Jones, and American Funds. Click here to learn about solo 401k provider that specializes in converting individual 401k plans, Single K, Unit K, Solo K and solo 401k plans to a self-managed 401k or self-directed solo 401k.

STEP 2: Register the LLC with the Secretary of State  

Once the solo 401k has been converted to a self-directed solo 401k, or is initially opened with a self-directed solo 401k provider, the next step is to register the LLC with the secretary of state.  Secretary of State registration fees range by state and can run as low as $50 to as high $600.

STEP 3: Prepare the LLC Operating Agreement

Now that the LLC has been registered with the Secretary of State, the self-directed solo 401k has been opened and funded—you can fund the self-directed solo 401k by transferring  IRAs or former employer plan funds such as 401k, 403b, 457b, 401a, and defined benefit plans—the next step is to have the LLC operating agreement prepared. Do not use an off-the-shelf (e.g., a legal zoom) LLC operating agreement because specific regulatory language surrounding the 401k regulations must be included--401k regulatory language  surrounding the prohibited transaction rules, disallowed investment rules, decedent account rules, QDRO rules, distribution rules, to name a few.

STEP 4: Attain the Employer Identification Number (EIN) For the LLC  

Next, attain an employer identification number (EIN) for the LLC. This can be done on-line using the IRS EIN website and it only takes about 5 minutes. 

STEP 5: Open the LLC Bank account

The LLC bank account can be opened at a credit union or a bank. The banker will ask for the LLC articles of Organization and a copy of the LLC employer identification number letter. 

STEP 6: Fund the LLC with Self-Directed Solo 401k Funds

Now that the LLC bank account is open, it is time to fund it by having the self-directed solo 401k funds wired to the LLC bank account or by writing a check from the self-directed solo 401k bank account. If funding by check, the check is made payable in the name of the LLC. 

STEP 7: Start Processing Solo 401k LLC Investments

Now that the LLC has been funded with self-directed solo 401k retirement funds, you can start placing investments. All investments will be titled in the name of the LLC and purchased using funds from the LLC bank account. Also, investment expenses and investment income will flow throuhg the LLC bank account and later to the solo 401k bank account, either while the LLC is still active or when it is dissolved.

Lastly, even though alternative investments (e.g., real estate, private shares, promissory notes, precious metals, tax liens, etc.) can be processed in the name of the self-directed solo 401k using funds from the solo 401k bank account, an LLC funded with solo 401k funds is still a commonly used method for investing retirement funds in alternative investments.

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     To learn more about the solo 401k click on Solo 401k FAQs.

Comments (7)

  1. Is there an example of the LLC Operating Agreement?  I understand that I shouldn't use Legal Zoom's generic Op Agreement... but I wouldn't know what specifically I would need to include (or the precise wording).

  2. confused by this post... how can you use a newly formed LLC for real estate investment if the offer/contract/title etc have to be in the solo 401k trust's name?  

  3. So I have a Single Member LLC owned by a Solo 401k Trust.  What are the tax filing requirements of the LLC?
    It has a Federal tax ID.
    Is there a 1065 and K1?

  4. Can the LLC be funded with funds from more than one Solo 401k? The Solo 401ks would be owned by different individuals.  This would be a way of pooling resources. Thanks.

  5. Good question. No as only a qualified plan such as a 401k/PSP can invest in one's own franchise. The franchise would be owned by a 401k/PSP owned C-corporation.

  6. If done this way, can the funds be used to finance a franchise fee?

  7. The self-directed IRA can also be invested in an LLC. When an IRA invests an LLC, it is ofter referred to as a checkbook IRA or IRA LLC. Click here to learn more about the IRA LLC.